Second Mortgage in Charge-Off Status

What are the ramifications of a second mortgage in charge off status?

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Woman putting foreclosure sign on house | Foreclosure, mortgage and charge off
Bill's Answer: Answered by Brad Stroh

Before addressing the central issues in your question, let us define charge off.

Charge Off

Charge-off (sometimes called write-off) is an accounting term used by creditors when they move a delinquent account from its accounts receivable books to its bad debt ledger. This usually occurs between 180 and 240 days from the date of the last payment. The fact an account is charged-off does not mean the debt may not be collected later. The charge-off date also does not correspond to the statute of limitations on collecting a debt, or the date that an entry on a credit record must be removed. All three dates or deadlines are independent of each other and have different meanings. I explain more about the ramifications of a second mortgage in charge-off status in just a moment.

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A charged-off account does not mean:

  • The debt is canceled
  • The debt is forgiven
  • The creditor forfeits a right to collect the debt

The creditor may move a charged-off account to its own internal collections department, or sell the debt to a third-party collection agency.

Second Mortgage Foreclosure

Home loan lenders have the right to foreclose if you fail to make your payments for any mortgage. The fact a second mortgage is in a junior position to the first mortgage does not prevent the second mortgage lender from foreclosing.

Try to work out some sort of a payment arrangement with your lender for the second mortgage to avoid a foreclosure. The foreclosure process varies from state to state, but generally takes from two to 18 months depending on the terms of your loan and your state of residence. However, a good rule of thumb is the bank can proceed with the foreclosure process if mortgage payments are not received within 150 days. See the Foreclosure Rules resource to learn the specific rules for your state.

If a foreclosure occurs, the second mortgage is paid after the first mortgage is repaid in full. If the sale price is less than the value of the mortgages held against it, then in most states you will owe a deficiency balance. The good news is a deficiency balance (if it exists and if your lenders pursue collections) is an unsecured debt you can enroll in a debt settlement program. However, some states outlaw the collection of mortgage deficiency balances. See the Anti-Deficiency resource to learn the rules for your state.

Quick Tip: Wrestling with a tough unsecured debt problem? Take your questions to the Debt Coach for an online, no-nonsense, no-cost analysis of your options and the cost of each.

Here is the good news: Lenders don’t like to foreclose on mortgages. Foreclosures are costly, so lenders foreclose only as a way of limiting losses on a defaulted loan. If homeowners get behind on payments, lenders will most likely work with them to bring the loan current.

To do so, however, communicate with the lender and be honest about your financial situation. The lender’s willingness to help with current problems will depend heavily on past payment records. If you have made consistent, timely payments and had no serious defaults, the lender will be more receptive than if the person has a record of unexplained late payments. If you are falling behind in payments or who know you are likely to do so soon, contact your lender right away about meeting to discuss alternative payment arrangements.

Loan Workout Plan

An agreement between borrower and lender to prevent the loss of a home is called a loan workout plan. It will have specific deadlines that must be met to avoid foreclosure. Therefore, it must be based on what the borrower really can do to get the loan up to date again. The nature of the plan will depend on the seriousness of the default, prospects for obtaining funds to cure the default, whether the financial problems are short-term or long-term, and the current value of the property.

If the default is caused by a temporary condition likely to end within 60 days, the lender may consider granting temporary indulgence. Those who have suffered a temporary loss of income but can demonstrate that the income has returned to its previous level may be able to structure a repayment plan. This plan requires normal mortgage payments to be made as scheduled along with an additional amount that will end the delinquency in no more than 12 to 24 months. In some cases, the additional amount may be a lump-sum due at a specific date in the future. Repayment plans are probably the most frequently used type of agreement.

Foreclosure, Generally

Foreclosure is a serious situation that has serious repercussions. If you can, you want to avoid a foreclosure as much at all costs. is here to help. We also offer helpful guides, foreclosure FAQs, glossary terms, and other helpful tools to help you keep your home and avoid a bank repossession.

You can find more in depth information about foreclosures on our foreclosure information page. See also Home Affordable Foreclosure Alternatives Program.

I hope this information helps you Find. Learn & Save.



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Comments (280)

Whitney J.
Las Vegas, NV  |  April 10, 2014
HI I started with 2 loans, got behind and applied for a modification. I included both mortgages but then was told by the modification agent that the 2nd had been written off and no longer valid. I was then advised to continue with modification without including the 2nd mortgage. Fast forward to today and within the last year my 2nd loan that was charged off by GMAC states on my credit report that it was done in March 2011, Ocwen who now owns my second says that it was charged off in Sept 2013. How do I get documentation of the original charge off in March 2011?
April 11, 2014
Charge-off is an accounting term, and has no significance under law. I do not understand what you would gain by having evidence that GMAC charged-off the loan in 2011.

The document you are probably more interested in seeing is any 1099-C that may or may not have been issued in 2011.
Robert S.
Hillsboro, OR  |  April 01, 2014
I had a chapter 7 bankruptcy discharge, including a second mortgage. I was able to retain the property because I had no equity in the house. The house was worth $126,000, 1st mortgage 103,000, 2nd mortgage 23,000. The second mortgage was discharged but the lien is still on the property. Over a year after the bankruptcy, they sent a letter acknowledging that I don't have to pay anything on the discharged second, but they do have a $20,000 lien on the property and if I want to put it behind me, they will settle for $4000, or 20% of the original loan, to remove the lien. The house is now worth $145,000. Are they offering me a good deal? Should I try to negotiate an even lower settlement offer? What if I do nothing and wait until selling the house to deal with it. Your thoughts?
April 10, 2014
When it comes to mortgages, a chapter 7 removes the borrower's personal liability for the note, but it does not change the creditor's claim to the security (the property). A chapter 13, on the other hand, strips the lien on a junior loan for underwater properties. Obviously, I have no insight into your situation, and it is likely your bankruptcy lawyer discussed the chapter 13 followed by a chapter 7 option with you. You may not have qualified for 13, then a 7, which is sometimes called a "chapter 20."

On to your questions. Is 20 cents on the dollar a good deal to lift the lien in this situation? We don't have a lot of history to go on here. readers have reported deals in the range of zero to 25 cents on the dollar for underwater seconds. Our advice? Consult with your bankruptcy lawyer before you sign any settlement to make sure you don't accidentally reinstate the loan or otherwise cause yourself harm. Offer the second $1,000 and see if the lender will budge on its price.
Marc S.
Caldwell, ID  |  April 01, 2014
The bank holding my second mortgage (US Bank) charged off my second mortgage. They did not notify me of this. I found out when I went to make a payment. I have missed 4-5 payments over the last 10 years but have made all other payments albeit some were late but I got them in the month they were due. I also did not receive an interest statement from them for tax purposes. I am not sure what is going on?
April 01, 2014
It would be helpful to know:
  • The market value of the property. (If you put it on the market today, how much could you realistically sell it for?)
  • The balance of your first mortgage
  • If your payments are current on the first mortgage
  • The balance of the second mortgage
  • If you were in any forbearance or other payment plan for the second at the time of the charge-off
  • The state in which the property is located
  • If the lender issued you a 1099-A or 1099-C
Momo S.
Stockton, CA  |  March 28, 2014
I lost my job and the bank agreed to forbearance. By the time I started a new job last month (been 11 months), the loans had already been sold about 3 months ago. 1st mortgage to SPS and 2nd mortgage to NationStar Mortgage. NationStar charged off the loan and after calling them stated there is a lien and won't be released unless I pay the remaining balance of $100. They also sold the loan to Veripro Solutions. I guess I am seeking advice on what to do here and possibly understand better all this charging off tactics. I am in the process with SPS to do a modification since I am making significantly much less than i was making before I lost my job. If I pay the $100 to NationStar and I am able to secure the "lien release", can veripro still come after me? Ideally I would have preferred all loans in one place but alas they are making life difficult for me.
March 28, 2014
I would do you a disservice to comment on the $100 NationStar or Veripro offer without knowing more about your situation and the offer itself. This could be the bargain of a lifetime, or a waste of money. Consult with a lawyer who has mortgage negotiation and litigation experience. He or she will read the NationStar contract, and will advise you accordingly.
Carlos F.
Pembroke Pines, FL  |  March 21, 2014
I have a problem with a second mortgage charge off. Apparently, it was reported as an i-9 after a short sale in Oct.2011. The first lien holder reported it differently. So now, I am in position to get a loan for a home again, but the way the second lien holder reported the second mortgage settlement is a problem. I don't have that problem with the primary mortgage lender. The second put it in writing that all debt was settled and they would not come after me for the deficiency. So how should I ask them to report this to the credit bureaus in a way that is not an i-9? Please help!
March 21, 2014
An I-9 is a U.S. Citizenship and Immigration Services form used to verify employment eligibility. I cannot imagine a set of circumstances where a lender would issue someone an I-9, unless it wants to hire that person.

Perhaps you were issued a 1099-A or 1099-C?
Joe G.
Saint Louis, MO  |  April 10, 2014
I am in the same situation. My first issued an i5, while the second filed paperwork and it was deemed an i9. Basically, it is a foreclosure and I am told there is nothing I can do. The only difference is how the first and second wrote it off. Any new information without stupidity would be welcomed.
April 10, 2014
I cannot find a reference to an IRS form "I5" you mentioned. Might that be a form issued by a state tax authority? What information was included on this document, and which agency issued it?

The only I-9 I am aware of is the Employment Eligibility Verification form issued by the US Citizenship and Immigration Dept. used to verify the identity and employment authorization of individuals hired for employment in the US.

Please share more information about the I5 and I9 you received so that we can research your question.
Tony H.
Twp Of Spotswood, NJ  |  October 04, 2013
I am also dealing with Chase. A couple of years ago I got laid off, and because there were little options had to take a job making much less than I used to. That of course set me back on my bills and how much I could afford. My primary mortgage lender worked with me and modified my loan to 2%. That helped a lot, but things were still tight. At that time Chase refused to modify our loan or do anything to lower payments. Things have come up where we have been short on money, so were late on a few payments with them. 5 months ago the Chase rep said they would try for loan modification. After 5 months, they called to say that we were denied, and BTW the loan has been charged off. My credit is shot at this point, but I'm looking to see what it will take for us not to lose the home. Maybe the CA will give us a lower payment? Or am I hoping for too much. Maybe I should just sell.
Stacy N.
Goodyear, AZ  |  March 27, 2013
My situation is slightly different. I live in AZ and have rec'd 1099-C Cancellation of Debt, but I have not rec'd a Release of Lien. After speaking with BOA, it appears as though they will not to send me one. Bank of America says, "Just because they forgave the debt doesn't mean they will release the lien until the debt is paid in full."

Any suggestions as to how to obtain a Release of Lien or a Release Certificate so I can refi and get away from Bank of America?

Thank you for this type of forum! as most of us can't afford to hire and attorney and need to do this leg work ourselves.
March 27, 2013
What you are experiencing with the 1099-C would not be out of place in Alice In Wonderland. Bank of America's explanation is accurate: A lender that issues a 1099-C may continue to pursue the borrower to collect the debt. Of course, this seems absurd because the 1099-C's title contains the plain language "Cancellation of Debt," which anywhere else in the English-speaking world would imply the lender abandoned hope of collecting the debt and declares to the federal government the IRS should consider the amount cancelled as income for the borrower. But no, that's not quite what a 1099-C means. Borrowers still owe a debt "cancelled" in a 1099-C.

You asked how to rid yourself of the loan and lien. You have two options:
  • Negotiate a settlement for less than the balance due. You have some leverage now that Bank of America has written-off the loan and has moved it out of its current accounts ledger.
  • Talk to a bankruptcy lawyer to learn if filing a chapter 13 would strip the lien on what I assume is a junior mortgage/deed of trust.
Susanna B.
Traverse City, MI  |  January 20, 2013
Hi, I just wrote a few minutes ago and wanted to add that both my 1st and 2nd mortgages are with Chase. The guy on the phone that told me a payment in full or a settlement was the only way to avoid foreclosure said "look at it from our point of view, you have equity in your home, you could sell it, pay it off, and still walk away with money." We want to stay in our home. We've lived here many years, and could never buy in this neighborhood again. Where would we go anyway? We could afford to buy another house, or get a loan!
January 23, 2013
For the benefit of other readers, whether the personal liability for a junior mortgage or deed of trust is discharged in a bankruptcy, a homeowner stopping their monthly payments allows the mortgage lender to foreclose. Again for the benefit of other readers, always consult with your bankruptcy lawyer about which payments you should and should not make when you file a bankruptcy. Failing to do so can result in unintended consequences, as Susanna's comments here illustrate clearly.

Susanna, consult with your bankruptcy lawyer immediately, and ask him or her to negotiate a settlement with Chase on the junior mortgage. The good news here is the Chase representative indicated a willingness on the part of the lender to negotiate a settlement. By all means, take them up on the offer and have your lawyer start talking to Chase now.
Susanna B.
Traverse City, MI  |  January 20, 2013
I just went through bankruptcy, it was discharged a few months ago. Reaffirmed my home with approximately 90,000 left on the mortgage. Also have a second mortgage (home equity loan) that I owe almost 30,000 on. My home is valued at approximately 180,00 - 200,000. First mortgage payments have been paid on time for years, the Home equity payments also, until the time of filing more than a year ago. We stopped making the home equity payments when we filed because we thought that portion was being discharged (not sure why we thought that). We just called the bank (Chase) to find out how to pay and get caught up and were told it was too late, it has been charged off and would be forclosed! We have enough money to make all missed payments and income to resume the loan, but they said no. They said they may make a settlementand to send them an offer. We are not sure what to do, as we only have around 5000. I'm sure no one would lend us the money this close after foreclosre. Any advice?
J T.
Royal Oak, MI  |  January 08, 2013
My boyfriend did a HAFA modification of his 1st mortgage. His 2d mortgage is with BOA. They sent him a letter stating that his 2d mortgage didn't qualify for a HAFA modification because his payment was under $100/mo. He just got a letter stating that his 2d mortgage has been "charged off" asking him to contact BOA to work out a payment arrangement. The letter states that a payment must be made within 10 days of the date of the letter. Thing is that he received the letter 11 days after it was dated. Thoughts? Strategy? Amount owing is $20K. House might be worth what the 1st mortgage balance is but is more likely slightly underwater. Do you think an offer of 10% of the balance would fly? If they take the offer do they have to relinquish the lien?
January 11, 2013
I recommend contacting the bank as soon as possible, explaining that the letter was just received, and working to reach an agreement. In terms of the percentage to offer, there is no fixed amount. Start low, at 10-15%. You can increase the offer, if necessary but not reduce it. If the agreement is to settle the debt in full, bringing it to a $0 balance, the lien would not remain in force. Get any agreement in writing and keep the correspondence, so you can prove that the debt was settled, in case you need to demonstrate that to another creditor.
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